Lisa Newfield, White Plains lawyer, Updated on Elder Law, American Council on Gift Annuities

The Deficit Reduction Act of 2005 (S. 1932) (DRA) was signed into law on February 8, 2006. Most sections were effective upon enactment. It substantially changed and restricted planning steps that can be taken to protect assets and achieve Medicaid eligibility for skilled nursing facility services, in particular. These changes affected the treatment of annuities, residences, the look back period, periods of ineligibility flowing from gifts and contracts with continuing care retirement communities. While DRA’s provisions are relatively clear, implementation at the state level has been sporadic and inconsistent. Thus, just because you understand the DRA’s provisions doesn’t mean you also understand how your jurisdiction implements the DRA. You must be familiar with how your jurisdiction interprets and applies to DRA be it by legislation, regulation or other state Medicaid program process.

This outline will focus on the specific changes made under DRA Sections 6011 – 6016, which address the changes to Medicaid asset transfer rules, and review current planning options under the DRA.

 

1. REFORM OF ASSET TRANSFER RULES

 

 

1.  

    

   1. Extension of Look-Back Period

    

 

Assets transferred for less than fair market value during the "look-back period" before an individual applies for Medicaid are added to the applicant’s countable resources. The individual’s eligibility for Medicaid for long term care will be delayed for a penalty period; the length of the penalty period is calculated by dividing the uncompensated value of the transferred assets by the monthly cost of private nursing facility care in the state.

 

DRA

 

Prior Law

 

The penalty period cannot begin until the expiration of any existing period of ineligibility. Once the penalty period is imposed, it will not be tolled (i.e. interrupted or suspended) even if he individual stops receiving institutional level care.

 

1.  

    

   1. Change in Start Date of Penalty Period

    

 

DRA

 

1.  

    

   1. The first day of the month during, or at the State option, the month after which, assets are transferred for less than fair market value; or

    

    

    

   2. The date on which the applicant is eligible for Medicaid and is receiving institutional level of care services (nursing home care), based on an approved application for such services that, were it not for the imposition of the penalty period, would be covered by Medicaid. The imposition of a penalty period requires a denial notice from Medicaid. (i.e. must submit an application for Medicaid.)

    

 

Prior Law

 

 

1.  

    

   1. Calculation of Penalty Period

    

    

   DRA

    

   Prior Law

    

    

    

   2. Aggregation of Multiple Transfers

    

    

   DRA

    

   Prior Law

    

    

    

    

    

    

    

   3. Annuities

    

   : When a number of assets are transferred during different months, then the rules varied based on whether the penalty periods overlap. If a penalty period for each transfer overlaps with the beginning of a new penalty period, then states had the option of either adding together the value of the transferred assets and calculating a single penalty period or imposing each penalty period sequentially. If the penalty period for each transfer does not overlap, then states were required to treat each transfer as a separate event and impose each penalty period starting on the first day of the month in which the transfer was made.: States have the option to determine the penalty period by treating the total of all uncompensated transfers as one transfer and impose one penalty period beginning on the earliest date applicable to any of the transfers, or apply multiple penalty periods.: States were permitted to round down and disregard the additional partial month penalty. In states that elected to impose no penalty period for such partial month transfers, individuals were able to transfer amounts less than the average monthly cost of nursing facility services in successive months, but never incur a penalty. : Requires states to impose penalty periods even in the case of smaller asset transfers, where the period of ineligibility would be less than a full month. In imposing penalties on such transfers, if the calculation of the penalty period produces a fractional amount, the penalty must include a partial month disqualification based upon the relationship between that fractional amount and the monthly nursing home rate used to calculate the penalty period.

 

DRA

 

Beginning with purchases or certain transactions by or on behalf of applicant annuitant, on or after the date of enactment of DRA, annuities will be treated as transfers for less than fair market value assets unless the annuity meets any of the three following conditions:

 

1.  
   1.  

       

      1. The annuity is held by an IRA; or has been purchased with the proceeds of

       

 

1.  

    

   1. an IRA;

    

    

   2. a simplified employee pension plan; or

    

    

   3. a Roth IRA, or

    

 

1.  
   1.  

       

      1. The annuity is

       

 

1.  

    

   1. is irrevocable and non-assignable; and

    

    

   2. is "actuarially sound" i.e. term is less than or equal to life expectancy of annuitant; and

    

    

   3. provides for equal periodic payments without deferral and without any balloon payment.

    

 

Prior Law

 

 

1.  

    

   1. Purchase of Life Estates

    

 

DRA

 

The rules pertaining to the purchase of life estates add a criterion for evaluating whether a transfer of assets has occurred, but does not replace existing rules in determining the value of life estates. Use of life estate tables published by SSA for SSI program must be used. If the payment of a life estate exceeds the fair market value of the life estate as calculated in accordance with the SSI tables, the difference between the amount paid and fair market value is treated as an asset transfer.

 

Finally, unless a state has a provision for excluding the value of life estates in its Medicaid plan, or the property in which the individual has purchased the life estate qualifies as the individual’s exempt home, the value of the life estate should be counted as a resource in determining Medicaid eligibility.

 

The DRA provision pertaining to life estates does not apply to the retention or reservation of life estates by individual transferring real property. In such cases, the value of the remainder interest, not the life estate, would be used in determining whether a transfer of assets has occurred and in calculating the period of ineligibility.

 

Prior Law

 

 

1.  

    

   1. Homestead

    

    

   DRA

    

   Requires states to consider the equity in an applicant’s home in determining eligibility for Medicaid for long term care in or out of a nursing facility and disqualify any applicant with home equity exceeding $500,000, or up to $750,000 at state’s option. As of 2011, this amount was increased by the percent of increase in the consumer price index. Effective January 1, 2012, the minimum home equity limit is $525,000 and the maximum home equity limit is $786,000.

    

   b) Exempt Family Members

    

   If a spouse, minor child or disabled child continues to live in the home, the applicant will not be disqualified.

    

   c) Reverse Mortgage

    

   Individuals are permitted to reduce their home equity through a reverse mortgage or home equity loan.

    

   Prior Law: No cap on home equity.

    

    

    

    

    

    

   2. Spousal Impoverishment Rules

    

    

   DRA

    

   Prior Law

    

    

    

   3. Waiver of Penalties due to Hardship

    

    

   DRA: State Medicaid agencies now may grant waivers if applying the penalties for transfers would deprive the beneficiary of:

    

   a) medical care, endangering the beneficiary’s life or health, or

   b) food, clothing, shelter or necessities of life.

    

   States must include in their state plans:

    

   a) notice to recipients that an undue hardship exists;

   b) a timely process for determining whether a hardship exists; and

   c) a process for appeal of an adverse determination.

    

   Prior law: No prior statutory law. These same criteria and procedural requirements were contained only in CMS Guidance.

    

    

    

   4. Continuing Care Retirement and Life Care Communities

    

   : States had the option of using the "resource first rule", where the resource allowance was increased to generate enough income to meet the minimum monthly maintenance needs allowance ("MMMNA") for a community spouse; or the "income first rule", where the applicant’s income was first allocated to the community spouse in order to meet the MMMNA. : Requires states to determine eligibility by examining and allocating the couple’s income before allocating resources. If the income of the community spouse is less than the state’s monthly income allowance, income or assets of the institutionalized spouse may be transferred to the community spouse to make up the difference. This is known as the "income first rule".
   : a) Minimum Amount:

 

DRA

: a) Admission Contracts

 

May include requirement that residents spend down their resources declared on admission to the CCRC before applying for Medicaid.

 

b) Entrance Fees

 

Entrance fees are countable resources to an applicant if:

 

1.  

    

   1. if applicant/resident may use entrance fee to pay for care, or the contract so provides;

    

    

   2. if part or all of entrance fee is refundable when the resident dies or terminates contract; and

    

    

    

   3. if resident does not acquire any ownership interest in the community by paying the entrance fee.

    

 

Prior Law

 

 

 

 

1. ESTATE RECOVERY

 

 

OBRA 93 mandated that states pursue a recovery from the estate of a deceased Medicaid recipient who was age 55 or older when he or she received Medicaid benefits or whom regardless of age, was permanently institutionalized. OBRA 93 also provided states with the option to expand estate recoveries to include assets that pass outside the probate estate and which the decedent had an interest in prior to death.

 

 

 

2. PROHIBITIONS ON RECOVERIES

 

 

1.  

    

   1. Deferral Of Recovery

    

   1.  

       

      1. During the lifetime of a surviving spouse;

       

       

       

      2. During any period in which the recipient has a surviving child under the age of 21 or a blind or certified disabled child; (This prohibition applies to all assets covered by the expanded definition of estate, including assets that pass directly upon the decedent’s death to individuals other than a surviving spouse or minor, blind or disabled child).

       

       

       

      3. As to the home of deceased Medicaid recipient, recovery is prohibited when one of the following relatives is residing in the home:

       

   1.  

       

      1. Surviving Spouse;

       

       

       

      2. Sibling with an equity interest (1 year immediately prior to institutionalization with an equity interest);

       

       

       

      3. Caretaker child (adult child in home for at least 2 years immediately prior to institutionalization and provides care).

       

   1.  

       

      1. Hardship Exception

       

       

      No recovery of Medicaid correctly paid will be pursued against all or a portion of the estate if it will result in undue hardship for example; family farm or family business and income produced by it are the only assets of the estate.

       

      Undue hardship is not considered to exist based on the inability of the beneficiaries to maintain a pre-existing lifestyle or when the alleged hardship is the result of Medicaid or estate planning methods involving the divestiture of assets.

       

       

      2. Deferral of recovery may also be considered on real property subject to a post death lien if:

       

      1.  

          

         1. undue hardship has not been found to exist;

          

          

          

         2. heir or survivor has lawfully and continuously resided in the real property commencing prior to death of the recipient and is unwilling to sell the real property;

          

          

          

         3. Medicaid claim can’t be paid in full unless the property is liquidated;

          

          

          

         4. heir or survivor is able to demonstrate inability to obtain financing to pay the estate claim;

          

          

          

         5. agreement with Medicaid and the dependent, heir or survivor where Medicaid holds lien and heir, etc., agrees to pay the amount of claim pursuant to reasonable payment scheduled and interest.

          

      1.  
         1.  

             

            1. Countable Resources For Medicaid

             

       

      2. ELDER LAW PLANNING

       

       

      Countable resources for Medicaid are defined as property of all kinds: personal, real, tangible and intangible, liquid and non-liquid. Liquid resources are cash, including bank accounts, stocks, bonds and cash value of life insurance. Non liquid assets are assets which are not readily converted to cash, such as real property.

       

      1.  

          

         1. Exempt Assets.

          

       

       

       

       

      1.  

          

         1. Retirement Assets

          

          

         Retirement accounts of the applicant may represent a significant assets when a Medicaid plan is being developed. A transfer of a retirement account to a spouse or disabled child, while exempt for Medicaid transfer purposes, will result in an income tax liability of the applicant. However, if the applicant retains ownership of the retirement account and is receiving the maximum available periodic payment* for that individual, then the principal of the retirement account is exempt and not a countable resource. For Medicaid purposes, a countable income stream will be created, but the principal will be protected.

          

         ROTH IRA are treated as fully available for Medicaid purposes.

          

          

         2. Planning Options

          

       

       

       

       

      3.  

          

      4. Irrevocable Trust

       

       

       

      5. Life Estates

       

       

       

      6. Gifts

       

       

    

    

    

 

Medicaid estate recoveries are prohibited:

 

 

 

If the prohibited period ends, for example, spouse dies, minor child reaches age 21 or with respect to the recipients home, the sibling or adult child no longer resides in the home or the home is sold, recovery can then be pursued.

 

 

: Social Security Administration prohibited Medicaid certified nursing facilities from requiring that individuals provide them with oral or written assurance that the resident is not eligible for or will not apply for Medicaid benefits.

: No prior law with respect to purchase of life estate.: States must treat funds or assets used to purchase a life estate in another individual’s home as a transfer for less than fair market value, unless the purchaser resides in the home for at least one year after the date of purchase. If an individual does satisfy the requirement, the entire funds used for the purchase must be included in the applicant’s countable assets.
: If an annuity was actuarially sound, it was not a disqualifying transfer, and there was no requirement to name the state as a beneficiary.: Purchase of an annuity by an applicant or by an applicant spouse, or annuity related transaction made by an applicant or an applicant spouse on or after February 8, 2006 will be treated as a transfer for less than fair market value unless the State is named as the remainder beneficiary. The State may receive up to the total amount of state payments for medical assistance for the annuitant. However, the applicant or applicant spouse may name a spouse or minor or disabled child as the first remainder beneficiary; if the state is named as second remainder beneficiary.
: Prior to DRA, the period of ineligibility or the penalty period would begin in the month of transfer or at the State option, in the month following the month of transfer. : The date that a period of ineligibility, or penalty period, begins will be the later of:
: Look-back period was 36 months; and 60 months for transfers to certain trusts.: The look-back period is increased from 36 months to 60 months.